PYMNTS Cryptocurrency Glossary: Central Bank Digital Currency

Cryptocurrency is a confusing business with a language all its own, in part because it is a genuinely new way of doing business and in part because it was created in large part by programmers and cryptographers, who should never be allowed to name anything regular people will use.

Cryptocurrencies have a lot of uses as an investment, as a currency for payments, as a store of value, as well as others. Like any investment, it’s vital to know what you’re talking about and more importantly what the person trying to sell you something is really saying. And like any other field of finance, industry, art or basically every human endeavor, it has its own lingo, acronyms and definitions.

See also: Dai or Die: ‘Payment Stablecoins’ and Why the Taxonomy of Crypto Matters

In this series of articles, we’re creating a number of glossaries for various parts of the crypto industry, which we’ll combine into a larger reference tool. Today, we’re talking about central bank digital currencies (CBDCs), many of which are or will likely be built on blockchain technology. In the last three years, CBDCs like a digital dollar have gone from something few people have heard about to national necessities. More than 100 countries are either studying, planning or developing CBDCs.

Read more: PYMNTS Cryptocurrency Glossary: The Basics

PYMNTS Cryptocurrency Glossary: Regulations, Legal and Crime

PYMNTS Cryptocurrency Glossary: Decentralized Finance or DeFi

PYMNTS Cryptocurrency Glossary: Stablecoins

Access: In this context, it means the access of individuals and businesses to payments services and the broader financial infrastructure.

Anti-Money Laundering (AML): See PYMNTS Cryptocurrency Glossary: Regulations, Legal and Crime

Central Bank: A national institution that that manages and controls the production and distribution of banknotes, digital cash and credit, formulates monetary policy and sets the amount of money in circulation. It sets interest rates and acts as a bank for commercial banks and as a lender of last resort.

Central Bank Liability: Paper currency and money held on deposit for commercial banks — reserves — are liabilities of the central bank. The Federal Reserve also lists reverse repurchase agreements, U.S. Treasury deposits, “Foreign official” deposits and “other deposits.”

Clearing: the process of settling transactions between banks and other financial organizations and institutions.

Countering the Funding of Terror (CFT): See PYMNTS Cryptocurrency Glossary: Regulations, Legal and Crime

Commercial bank: Institutions that provide financial services and lending facilities to the general public and businesses.

Controlled Anonymity: The Bank of China’s phrase for the amount of privacy it will actually provide users of the digital yuan when it scrutinizes the very substantial data it collects from those transactions.

Digital Currency Electronic Payment (DCEP): The official name of China’s digital yuan. Also known as e-CNY.

Digital Dollar: A hypothetical U.S. CBDC that is being studied by the Federal Reserve, Treasury Department and others.

Digital Euro: The CBDC being considered by the EU.

Digital Yuan: The nearly ready-to-launch Chinese CBDC. Formally the e-CNY, DCEP or digital renminbi.

Direct access: Access to a retail CBDC for which the central bank handles onboarding, distribution and settlement services to end users directly rather than through commercial financial institutions.

Disintermediation: refers to a CBDC in which the central banks offer direct access to consumers and commercial banks out of the loop. This would be a disaster, banks say, because they would have fewer deposits to turn into loans, worsening financial downturns — when people would be more likely to put funds into CBDCs issued by the central bank, which cannot fail.

Read more: Heyday or Doomsday? Regulators, Banks at Odds Over CBDCs

Distributed ledger technology (DLT): The technology that blockchains are built upon. Some studies have suggested that some distributed ledger technologies would be better platforms for CBDCs than blockchains.

See also: Boston Fed, MIT Digital Dollar Test Casts Doubt on Blockchain as Processing Platform

Federal Reserve: The U.S. central bank.

FedNow: The Federal Reserve’s real-time payments solution.

Financial Inclusion: A major declared reason for CBDCs, particularly in developing nations, is to bring more unbanked and underbanked (see below) people into the financial system.

Individual holding limit: The European Central Bank (ECB) defines this as the maximum amount of digital euros (or other retail CBDC) that one person is allowed to hold. These limits are low — a few thousand euros at most — to prevent bank disintermediation.

Interoperability: A very big discussion in CBDC design is how to make them usable to settle transactions across borders while operating only in their own systems. It’s a big but tough question that the Bank for International Settlement has focused on.

Legal tender: A means of payment like a currency that must be accepted at its full face value to settle and public or private transaction.

Lender of Last Resort: Central banks play this role, offering loans to prop up banks that are struggling or near collapse.

Offline payment: A payment settled between a payer and payee without the need for Internet or other access. Making this happen is an important and challenging part of CBDC design.

Permissioned blockchain: A privately controlled blockchain that does not allow anyone to become a node operator or to use its tokens.

Read more: Crypto Basics Series: What’s a Permissioned Blockchain and How Does Centralized Decentralization Work?

Privacy: In this context, it means the extent to which a CBDC will protect the privacy of users. As AML requirements mean they cannot be totally private, a trade-off is necessary. But the amount of data a government could glean from a CBDC not designed to limit that is massive.

QR Code: The scannable, square, dot matrix-style quick response codes are being used in China as a way to let merchants connect easily and cheaply to the digital yuan. It could also have a role in offline CBDC payments.

Real time payments: A payment that is settled instantly. This can be a problem with cryptocurrencies issued on blockchains, which require multiple blocks to be added after a block before the settlement is finalized.

Read more: Crypto Basics Series: What’s a Blockchain and How Does It Work?

TCH Real Time Payments: The Clearing House’s Real Time Payments network is a commercial network for settling payments in real time.

Sand Dollar: The Bahamas issued the first real central bank digital currency, the Sand Dollar.

Settlement: Settlement is the completion of a payment transaction.

Settlement Finality: When one party has transferred an asset or a financial instrument to another party, and that transfer becomes unconditional and irrevocable.

Stablecoin: a privately-issued cryptocurrency token pegged — generally one-to-one — to a fiat currency. This is often maintained by keeping a one-to-one reserve of fiat currency or highly liquid treasuries.

Retail CBDC: A central bank liability issued in digital form to the general public for the purpose of making retail payments.

Unbanked: People without a bank account. Generally refers to very poor people who cannot access or afford a bank account and are thus effectively cut out of the financial system. It’s a widespread problem in developing nations, but there are an estimated seven million unbanked people in the U.S.

Underbanked: People with access to a checking account but who must rely on alternative financial services like payday loans and check-cashing services.

Wholesale CBDC: A CBDC issued not to the general public but to banks and financial institutions for back end, interbank settlement. A number of countries are investigating or planning wholesale CBDCs in addition to or instead of a retail CBDC.